A company purchases 5,000 units per quarter at an even rate throughout the year. Each order placed with the supplier incurs a delivery charge of £20. The annual cost of holding one unit in inventory is £5.
What is the minimum total of the inventory costs (order costs plus holding costs) per year?
you need to use EOQ formula to find out optimal order amount: EOQ= [2*20*5000*4/5]*(0,5)=400 units per order. number of orders = 5000*4/400=50 average inventory would be 400/2=200 units. re-order costs in this case amount to 50*20=1000$. holding costs are 200*5=1000$ total min inv costs are 1000+1000=2000$.